Mexico: Business Solutions for Currency & Inflation Risk in Contracts

Mexico offers deep trade and investment linkages with global partners and a diversified domestic market. That makes long-term contracts — infrastructure concessions, multi-year supply agreements, project finance loans, and energy offtake deals — commercially attractive. At the same time, such contracts are exposed to two related macro risks:

Currency risk: shifts in the Mexican peso (MXN) relative to major billing currencies, most often the US dollar, can alter the actual worth of both payments and returns.
Inflation risk: sustained increases in overall price levels gradually diminish fixed-rate income streams while pushing up local expenses tied to labor, materials, utilities, and taxes.

The Bank of Mexico targets low and stable inflation (a 3% goal with a typical tolerance band around that target). Nevertheless, episodes of elevated inflation and peso volatility — for example the broad inflation shock and exchange market moves during and after the global pandemic period — illustrate why firms must build mitigation into long-term contracts.

Types of exposure in long-term contracts

Transaction exposure: known future receipts and payments in MXN or foreign currency whose value moves with exchange rates.
Translation exposure: accounting impacts when subsidiaries report in pesos but parent companies consolidate in a foreign currency.
Economic exposure: long-term shifts in competitiveness and profitability due to relative inflation rates and persistent currency trends.
Indexation and passthrough risk: when cost items are indexed to local inflation, but revenue is not (or vice versa), creating margin squeeze.

Contractual design strategies

Carefully crafted contracts serve as the primary safeguard, as they assign risk, outline adjustment frameworks and establish procedures for resolving disputes.

Invoicing currency clauses — specify whether payments are in MXN or a foreign currency (typically USD). Export-oriented buyers and sellers often prefer USD invoicing to eliminate MXN settlement risk.
Indexation provisions — tie prices to an objective inflation reference such as the official CPI or an inflation-indexed unit. In Mexico, many long-term public-private partnership tolls, rents and regulated tariffs use inflation indexing to preserve real values.
Escalation and price-review clauses — permit scheduled or trigger-based price resets if cumulative inflation or cost indices breach thresholds.
Currency band or shared-risk mechanisms — split FX movements within a band between parties; beyond the band, parties renegotiate or the buyer compensates the seller.
Dual-currency or basket clauses — allow payment in either currency or in a weighted basket to reduce concentration risk.
Force majeure and macroeconomic change provisions — define when extreme macro shocks permit contract suspension, termination, or emergency price adjustments; include dispute resolution pathways.

Markets and tools for financial hedging

When contractual clauses do not fully remove exposure, firms use financial hedges available in Mexico’s markets and global markets.

Forwards and futures — forward FX agreements secure a predetermined exchange rate for settlement at a later date. USD/MXN futures are traded on both Mexican and international platforms (MexDer and leading global markets), offering clear pricing and standardized tenors.
Options and collars — currency options deliver one-sided protection: an MXN put option shields against depreciation while keeping potential gains. Collars confine losses and gains within set limits and can lower overall hedging expenses.
Cross-currency swaps — principal and interest payments in one currency are exchanged for those in another, aligning long-term debt obligations with the currency of incoming cash flows.
Inflation swaps and CPI-linked derivatives — these instruments let counterparties trade fixed payments for inflation-adjusted flows, providing insulation from domestic inflation whenever local revenues or costs are affected.
Local instruments linked to inflation — Mexico offers inflation-indexed securities and units that maintain real purchasing power; using these units is a frequent approach for managing long-term domestic liabilities.

Practical note: liquidity differs by maturity and instrument, with short- and mid-term forwards generally offering strong trading depth, while long-dated hedges remain accessible though typically more expensive, and many large projects therefore rely on layered strategies combining rolling forwards, options, and swaps to manage both cost and protection.

Operational and natural hedges

Financial hedges can be complemented by operational measures that reduce net exposure.

Currency matching on the balance sheet — borrow in the currency of revenues or hold cash buffers in foreign currency so that liabilities and assets align.
Local sourcing and cost alignment — increase procurement in the invoicing currency or index local supplier contracts to the same reference as revenues.
Diversified revenue streams — serve multiple markets or customers invoicing in different currencies to reduce concentration risk.
Manufacturing footprint allocation — locate production where input costs naturally offset currency exposures (near-shoring to Mexico for USD revenue-generating exports creates natural currency alignment).

Sectoral case examples

Export manufacturing: A North American firm with a 10-year supply agreement with a Mexican contract manufacturer may require the contract to be invoiced in USD. The buyer still faces translation exposure in Mexico but the seller secures revenue in a stable currency. The manufacturer can hedge residual MXN working capital needs with short-term forwards and match local wage inflation by indexing local subcontracts to CPI.
Infrastructure concessions: Toll road concessions often have revenues collected in local currency but financing in USD or with USD-linked debt. Common practice is to index tolls to CPI or to Mexico’s inflation-indexed unit, and to include revenue-sharing mechanisms when inflation exceeds predefined bands. Lenders typically require cross-currency swaps or revenue accounts to insure debt service in USD.
Energy and gas supply: Long-term gas offtake or power purchase agreements commonly denominate payments in USD to protect investors from peso weakness. Where host-country law or regulators require local-currency billing, contracts include pass-through clauses where fuel and transportation cost components adjust with clear indices.
Project finance and public-private partnerships: Lenders demand robust mitigation: revenue indexation, FX hedges, escrow accounts, and step-in rights. Models stress-test scenarios with peso depreciation and double-digit inflation spikes to size reserves and contingency facilities.

Legal, tax and accounting factors

Governing law and enforceability: Choice of law and forum clauses matter. International creditors prefer neutral arbitration clauses and foreign governing law to reduce sovereign or local-judicial uncertainty.
Tax treatment: Currency gains and losses can have taxable consequences. Contracts with currency-based price adjustments must be structured to comply with tax rules on corporate income and invoicing. Work with local tax counsel to avoid unintended tax timing or valuation issues.
Accounting and hedge accounting: Under international accounting standards, firms must document hedge relationships and effectiveness to achieve hedge accounting treatment for FX and inflation hedges. This reduces earnings volatility but requires robust controls and documentation.

Implementation playbook: spanning the path from negotiation to ongoing oversight

Risk identification and quantification: model cash-flow sensitivities to MXN moves and inflation scenarios across multiple horizons. Use stress tests (e.g., 20% peso depreciation, 5–10 percentage point inflation shocks) and Monte Carlo scenarios for probabilistic view.
Contract drafting: include precise indices, rounding rules, adjustment frequencies, caps/floors, dispute resolution, and information-sharing obligations for index data. Avoid vague or subjective triggering language.
Hedge selection: combine contractual mitigation with financial hedges. Balance cost and effectiveness: a collar may be cheaper than a series of forwards but provides limited upside.
Operational alignment: match procurement, payroll and debt currency to revenue currency where feasible; use local CPI-indexed contracts to sync cost flows.
Ongoing governance: set limits, reporting lines, and a review cadence for macro updates; update model assumptions when monetary policy or fiscal outlook shifts.

Illustrative Examples

A foreign company enters a 12-year supply agreement with a Mexican buyer involving fixed MXN payments totaling MXN 100 million per year, anticipating cumulative inflation of about 40% over the period and projecting roughly 25% MXN depreciation against the USD throughout the term.

If payments remain fixed in MXN, local inflation steadily weakens purchasing power, causing real revenues to shrink and reducing the foreign investor’s USD-equivalent income as the currency depreciates.
Mitigation package: apply annual CPI-based adjustments reflecting actual inflation, issue invoices in USD while allowing MXN payments indexed to CPI, and hedge projected USD/MXN cash flows by layering five-year forward contracts that are periodically rolled, complemented by a long-dated FX option collar to curb extreme downside risk.
Trade-off: attempting to fully hedge the entire 12-year position with forwards may prove too costly or hard to source, whereas a staggered mix of hedges and options retains potential gains if the peso strengthens unexpectedly while concentrating protection on unfavorable movements.